Polly Peck International plc (PPI) and its administrators, Mr R A
Stone, Mr M A Jordan, Mr C Morris, Mr C J Barlow, PPI and Mr I Bond, appealed
with leave of Peter Gibson LJ granted on 6 February 1997 from the order of
Rattee J ([1997] 2 BCLC 630) on 6 December 1996 whereby he granted the
applicants, Marangos Hotel Co Ltd, Pharos Estates Ltd, Agricultural Products
Co-operative Marketing Union (Sedigep) Ltd and Cyprus Ports Authority, leave to
commence proceedings against PPI. The facts are set out in the judgment of
Mummery LJ.

7 May 1998.

The following judgments were delivered.

MUMMERY LJ (giving the first judgment at the invitation of
Nourse LJ).

INTRODUCTION

This is an appeal from the order of Rattee J ([1997] 2 BCLC 630)
dated 6 December 1996 granting leave, pursuant to s 11(3)(d) of the Insolvency
Act 1986, to four applicants (the respondents to this appeal) to commence
proceedings by way of writ against Polly Peck International plc (PPI), one of
the appellants. The five other appellants are the administrators of PPI, which
is massively insolvent and has been in administration under an order of the
High Court since 25 October 1990. [*815]

APPLICATION FOR LEAVE

Section 11(3)(d) of the 1986 Act provides that, during the period
for which an administration order is in force:

 no other proceedings
may be commenced against the company except
with the consent of the administrators or the leave of the court and subject
(where the court gives leave) to such terms as [the court may
impose].

The administrators of PPI refuse to consent to the
commencement of proceedings based on a draft statement of claim setting out the
applicants proposed claims against PPI. They contend that the draft
statement of claim fails to disclose a seriously arguable case, justiciable in
the English courts, against any of the proposed defendants. It is common ground
that leave should only be granted by the court if it is satisfied that the
draft statement of claim discloses a seriously arguable case on the merits, as
well as on jurisdiction.

The proposed claims arise out of alleged wrongful occupation of
immovable property in Cyprus. The applicants assert that it is owned by them.
They claim to be entitled to immediate possession of it. They claim that, to
the knowledge of the proposed defendants, they were deprived of their property
by armed force or threat of armed force, followed by expropriatory and
discriminatory measures of the organs of an unrecognised state. The property is
situated in that part of Northern Cyprus occupied by Turkey since an armed
invasion in the summer of 1974.

PPI and the administrators argue that the proposed action is bound
to fail on two grounds: first, the English courts have no jurisdiction to
entertain the proposed action by virtue of the rule in British South Africa
Co v Cia de Moçambique [1893] AC 602, [1891-4] All ER Rep 640 (the Moçambique rule), as modified by
s 30(1) of the Civil Jurisdiction and Judgments Act 1982; and secondly, even if
the English courts do have jurisdiction, the claims are misconceived and fail
to disclose any seriously arguable case.

FACTUAL BACKGROUND

Cyprus

The Republic of Cyprus came into being as an independent sovereign
state on 16 August 1960. Since then all states, with the sole exception of
Turkey, have recognised that the Republic is the lawful sovereign of the whole
of the island.

In the summer of 1974 Turkey invaded the island. By 16 August 1974
it had occupied a large area in the north amounting to just over one third of
the whole island (the occupied area). Many members of the Greek Cypriot
community in the occupied area fled, in fear of armed force, from their homes
and businesses to other parts of the island.

On about 13 February 1975 Turkey instigated an entity calling
itself the Turkish Federated State of Cyprus. It was not
recognised by any state or international organisation.

On about 15 November 1983 the Turkish Republic of
Northern Cyprus (TRNC) was declared by the Turkish Cypriot
authorities, purporting to create an independent state in the occupied area. No
state, apart from Turkey, and no international organisation has recognised
TRNC. The United Kingdom has never recognised and does not recognise TRNC (or
the Turkish Federated State of Cyprus) as a state in the occupied area or at
all. The United Kingdom has never [*816] recognised any government in the
occupied area other than the Government of the Republic of Cyprus.

The land and properties

Each of the applicants claims to be the owner of, and to be
entitled to, immediate possession of land, buildings and other immovable
property in the occupied area.

(1) The Constantia Hotel, Famagusta

The Marangos Hotels Co Ltd (Marangos) is a company incorporated
under the law of the Republic of Cyprus and is mainly owned and controlled by
members of the Greek Cypriot community. Marangos claims that in 1974 it owned
the Constantia Hotel (now called the Palm Beach Hotel) and the plot of land on
which it stood. It still maintains that claim.

(2) Jasmine Court, Kyrenia

Pharos Estates Ltd (Pharos) is incorporated under the law of the
Republic of Cyprus and is mainly owned and controlled by members of the Greek
Cypriot community. It claims that in 1974 it was the owner of a complex of
apartments and other facilities called Jasmine Court (now called the Jasmine
Court Hotel) in the Livadhia area, Kyrenia. It still maintains that claim.

(3) Packaging plant, Kato Zhodia

Sedigep Ltd (Sedigep) is a co-operative society with limited
liability formed under the law of the Republic of Cyprus and is mainly owned
and controlled by members of the Greek Cypriot community. It claims that in
1974 it was the owner of a fruit and vegetable packaging plant at Kato Zhodia
on the west bank of the Potami river. It still maintains that claim.

(4) Warehouse 20, Famagusta

The Cyprus Ports Authority (CPA) is a state body of the Republic
of Cyprus established in 1973 and operational since 1 January 1977 with
responsibilities for administering all of the ports of the Republic of Cyprus.
It took a transfer of the Port of Famagusta with effect from 1 August 1976. It
claims that its predecessor, the Department of Ports, was in 1974 the owner of
Warehouse 20 and the plot of land on which it stands in the port of Famagusta.
Ownership was transferred to CPA on 1 August 1976 and CPA still maintains that
claim.

Expropriation

It is not disputed on this appeal that, following the invasion of
the occupied area, the four properties mentioned were expropriated. Under the
purported legislation (Law 32 of 1975) described in the judgment of Rattee J
([1997] 2 BCLC 630 at 635) all immovable property belonging, inter alia, to
Greek Cypriots, was transferred into the control and ownership of the minister
of finance of the Turkish Federated State. Under a second purported law in 1985
(s 159) immovable property and land in TRNC, the owners of which were no longer
present, was declared to be the immovable property of TRNC, who were to be
entitled to lease it and make grants for long periods.

The applicants contend that their property, purportedly
expropriated in this way, was, with knowledge of the wrongs committed against
them and their property, illegally occupied and exploited without their
authority by direct or [*817] indirect subsidiaries of PPI, or by persons acting
for or at the direction of the administrators then serving. The properties were
occupied under leases and contracts for leases entered into by ministries of
TRNC and the relevant PPI subsidiary. It is alleged that by this means PPI
derived substantial financial advantages from the commission of illegal acts.
This state of affairs continued until the sale of the shares in the
subsidiaries for a substantial (but undisclosed) sum by PPI to Learned Ltd on
24 March 1995. The proceeds are in the hands of the administrators, who have
explained in their evidence their problems in the administration and have
sought to justify the disposal of the shares on the best terms reasonably
achievable by reference, inter alia, to the fact that they have never been able
to exercise effective control over the conduct of the businesses of the
subsidiaries or over the properties occupied by them in TRNC.

PPI

PPI, formerly called Polly Peck (Holdings) Ltd, was incorporated
in the United Kingdom. It was a holding company for a world wide group,
including over 200 direct and indirect subsidiary companies. PPI is insolvent
and subject to an administration order made in the Chancery Division of the
High Court on 25 October 1990 under s 8 of the Insolvency Act 1986. All the
individual appellants are accountants appointed by the court at various times
to act as administrators of PPI. Three of them are also joint scheme
supervisors of the scheme of arrangement made under s 425 of the Companies Act
1985.

From about 7 July 1980, when he was appointed as chief executive,
until the making of the administration order, Mr Asil Nadir, a Turkish Cypriot,
controlled the affairs of PPI and the PPI group.

The subsidiaries and members of the PPI group relevant for the
purposes of these proceedings are the following:(a) Red Peppers Ltd, a company
incorporated in England;(b) PPI Holdings BV, a company incorporated in the
Netherlands;(c) Voyager Mediterranean Ltd (a direct subsidiary) and Voyager
Ltd, two companies incorporated in the Isle of Man;(d) Uni-Pac Packaging
Industries Ltd, Voyager Kibris Ltd and Sunzest Trading Ltd, three
companies alleged to have been incorporated under TRNC
law;(e) Spiel-Gerate GmbH (SG), an indirect subsidiary incorporated
in Germany.

It is contended by the applicants that:(1) all these companies
were members of the PPI Group, being either direct or indirect subsidiaries of
PPI;(2) all of them should be treated as a single commercial unit with PPI as
the ultimate parent company;(3) all the companies and the arrangements between
them and PPI constituted a facade, so as to justify lifting the corporate veil
and treating acts of the subsidiaries as acts of PPI;(4) PPI directed,
controlled, aided and counselled their actions, involving the commission of
torts to the applicants properties in furtherance of the common
design with the subsidiaries concerned and was therefore a joint tortfeasor.

The causes of action

The applicants plead the following causes of action. (1) The
administrators of PPI caused and/or assisted PPI to sell all the shares in
Voyager, SG and Uni-Pac on 24 March 1995 for an undisclosed, substantial
consideration received by them to Learned Ltd, a company
incorporated under TRNC law. Mr Asil Nadir has been a
director of Learned since 27 March 1995. The sum received by the administrators
(the Learned consideration) represents the profits and proceeds of wrongdoing
by PPI and subsidiary members of the PPI group, which has been [*818] unjustly
enriched at the expense of the applicants. The Learned consideration is
therefore subject to a constructive trust for the benefit of the applicants as
owners of, and persons entitled to, immediate possession of the properties
leased by TRNC to the PPI subsidiaries. In the submissions this is referred to
as a remedial constructive trust. (2) Alternatively, the
administrators are under an obligation to the applicants to account for the
Learned consideration or are subject to an obligation to pay equitable
compensation and/or damages to the applicants. (3) The applicants are entitled
to trace into the Learned consideration received by the administrators the profits
derived by the subsidiary companies of PPI from the illegal or wrongful
occupation and exploitation of the properties.

The relief claimed

Relying on these causes of action, the applicants claim the
following relief. (1) A trust or constructive trust for their benefit of the
Learned consideration held by the administrators of PPI. (2) Alternatively, a
declaration that the Learned consideration was money had and received by the
administrators to the use of the applicants or that the administrators are
under a duty to account to the applicants for the consideration. (3) An account
of the profits of the wrongful occupation and exploitation of the properties,
alleged to be traceable into the Learned consideration. (4) A charge on the
Learned consideration or payment of equitable compensation and interest,
together with all accounts inquiries and directions.

Although the relief sought is in part based on in personam claims
against PPI and the administrators, the essential object of the proposed action
is, as noted by Rattee J ([1997] 2 BCLC 630 at 644), to establish a
proprietary claim to the proceeds of the sale to Learned
Ltd. The applicants skeleton argument mentions in paras 28
and 29 the alleged liability of the administrators as accessories to breach of
trust by PPI and its subsidiaries, giving rise to a constructive trust, and the
personal claims for money had and received and for damages against PPI and the
administrators. But, in view of the insolvency of PPI, Miss Dohmann QC (for the
applicants) naturally focused her written and oral submissions on the
proprietary claim for a constructive trust of the Learned consideration. If
that claim is not seriously arguable, there is, in my view, no other claim
against PPI or the administrators which would justify the grant of leave to
commence the proposed action. The remainder of this judgment proceeds on that
basis.

I would also add that no differences between the law of the
Republic of Cyprus and English law are at present relied upon.

JURISDICTIONTHE LAW

As the decision of the judge was largely based on the question of
jurisdiction, the main jurisdictional rules should first be identified.

The Moçambique rule

The rule was stated as r 79 in Dicey and Morris on the Conflict
of Laws
(9th edn, 1973) as follows:

Subject to the exceptions
hereinafter mentioned, the court has no jurisdiction to entertain an action for
(1) the determination of the title to, or the right to possession of any
immovable situate out of England (foreign land); or (2) the recovery of damages
for trespass to such immovable. [*819]

The Civil Jurisdiction and Judgments Act 1982

Section 30(1) of the 1982 Act provides:

The jurisdiction of any court in
England and Wales or Northern Ireland to entertain proceedings for trespass to,
or any other tort affecting, immovable property shall extend to cases in which
the property in question is situated outside that part of the United Kingdom
unless the proceedings are principally concerned with a question of the title
to, or the right to possession of, that property.

JUDGMENT OF RATTEE J

The judge reached the following conclusions:

(1) The Moçambique rule

The court has no jurisdiction to entertain the action by virtue of
the rule, as re-stated and applied in the context of a claim to land in
Northern Cyprus in Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] 2 All ER 1168,
[1979] AC 508. The applicants claim is based on alleged legal
ownership of their properties in the occupied area. The judge rejected the
argument that this case falls within an exception to the rule as a claim for an
equitable interest by way of constructive trust in the proceeds of sale of
shares in the subsidiaries by PPI to Learned.

(2) Section 30(1) of the 1982 Act

The court has jurisdiction to entertain the proposed proceedings
under s 30(1). The judge accepted the administrators submission that,
as the question of jurisdiction was a pure point of law on which he heard full
argument, he should decide it rather than confining himself to a view on
whether the jurisdiction point was arguable. He concluded ([1997] 2 BCLC 630 at
641) that the proposed proceedings were not principally
concerned with a question of title to, or the right to possession of
property situated outside the United Kingdom. He stated that the word
principally meant for the most part or
chiefly and added ([1997] 2 BCLC 630 at 642):

I do not consider that the
applicants action would be principally concerned with the question of
the applicants title to, or right to possession of, the
applicants properties. Of course, as in any action for trespass to
land, it would be a sine qua non of success that the plaintiffs proved their
right to possession at the dates of the alleged trespass, but that right is far
from the only substantial question raised by the proposed statement of claim.
In particular it raises the questions: (a) whether PPI itself committed any
acts which can be characterised as trespass by it on the applicants
properties or any of them; (b) whether by some process referred to as
piercing the corporate veil PPI can be held responsible for
acts of trespass by its direct or indirect subsidiaries; (c) whether, even if
question (a) or (b) is answered in the affirmative, the applicants have any
rights in specie in the proceeds of the sale by PPI of shares in its
subsidiaries to Learned Ltd, as opposed to a right in personam entitling them
to participate in the scheme of arrangement relating to PPI. Such questions
cannot, in my judgment, be said to be merely incidental to the question of the
applicants right to possession of the applicants
properties. Of course they will not arise unless the latter question is decided
in the applicants favour, but they are substantial questions going to
the applicants right to the relief sought in the action. They are not
minor [*820] or incidental questions. Given that the relevant
proceedings, if allowed to be brought, will concern such questions quite as
much as the question of the applicants right to possession of the
properties concerned, in my judgment those proceedings would be concerned, but
not principally concerned, with such right to possession. I consider that the
purpose of s 30(1) of the 1982 Act is to preserve the Moçambique rule only in cases
where the real issue in the proceedings is the question of title to, or the
right to possession of, foreign land, and all other questions are merely
incidental thereto. Such is not this case. Accordingly, in my judgment the
court would have jurisdiction to entertain the proposed action by virtue of s
30(1) of the 1982 Act.

(3) Seriously arguable case

The judge concluded that, although the draft statement of claim
faces formidable obstacles, it does disclose a seriously
arguable claim against PPI. The judge agreed with the administrators that the
sale by PPI of its interests in its subsidiaries had not caused loss to the
applicants or resulted in PPI acquiring any property belonging to the
applicants; that if, before the sale, the applicants had good causes of action
for trespass against the subsidiaries, those causes of action were unaffected
by the sale; that if the amount of the proceeds of sale had been increased by
the fact that subsidiaries had benefited from the alleged trespasses, then PPI
had obtained the benefit of that increase, not from the applicants but from
Learned Ltd, which had paid the sale price without discounting for the
outstanding liabilities of these subsidiaries to the applicants; that the
applicants had no seriously arguable case for the existence of a constructive
trust based on PPI being an alleged dishonest accessory to a breach
of trust committed by the subsidiaries, as there was no evidence of
any fiduciary relationship between the allegedly trespassing subsidiaries and
the applicants and therefore no basis on which the trespasses could be said to
have been in breach of trust; that there was, therefore, no seriously arguable
case for the existence of any institutional constructive
trust affecting any part of the proceeds of the sale by PPI to
Learned Ltd. The judge concluded, however, that the statement of claim does
disclose a seriously arguable case against PPI based on the following
allegations:

(a)
that the applicants remained at all material times entitled to possession of
the applicants properties,(b) that PPI knew that its subsidiaries
were exploiting those properties, to which it knew the applicants claimed title
and the right to possession,(c) that PPI actively encouraged such
exploitation,(d) that it has benefited from that exploitation and should be
bound to disgorge such profit, and (e) that the court should accordingly impose
a remedial constructive trust on so much of the proceeds of sale by PPI to
Learned Ltd as represents such profit. (See [1997] 2 BCLC 630 at
648-649).

On the claim for the imposition of a remedial
constructive trust the judge expressed no opinion as to the prospect
of success, save to say (at 649) that it seemed right in the
interests of justice that the applicants should have leave to make
it. The judge relied on a passage cited from the judgment from the
Court of Appeal in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette
Inc
[1989] 3 All ER 14 at 57, [1990] 1 QB 391 at 479. Although the judge concluded
that the claim for a remedial constructive trust over part
of the proceeds of sale in the hands of PPI was seriously arguable, he
expressed doubts about the submission of the [*821]
applicants counsel that it was just to impose such a trust. He said
([1997] 2 BCLC 630 at 648):

In
my judgment it is by no means clear that the court would so consider it,
particularly where, as here, the relevant defendant (PPI) is insolvent, so that
a remedial constructive trust in favour of one claimant against it will prima
facie prejudice other persons with unsecured causes of action against
it.

It is a question which, in his view, he could not properly
determine on the application for leave. The judge concluded that it was not
appropriate for him to reach any conclusion on the prospects or even
arguability of claims in the proceedings, other than the remedial
constructive trust claim. If the proceedings were issued including
those other claims, it was open for any defendant to take interlocutory steps
by way of application to strike out parts of the pleading (see at 649).

ISSUES ON APPEAL

(1) Seriously arguable case

The making of an administration order, as with the case of a
winding-up order, triggers a prohibition on proceedings being commenced or
continued against the company. While the administrators seek to achieve the
statutory purpose for which they are appointed, a moratorium is imposed on the
enforcement of proprietary and other rights against the company. The
administrators are officers of the court. They are expected to make their
decisions responsibly. The court may give directions to them on the conduct of
the administration. The court may grant leave for the commencement of
proceedings against the company under s 11(3)(d) of the 1986 Act, provided that
the application for leave discloses that the jurisdiction of the court to
entertain the claim has been sufficiently established in respect of a seriously
arguable case: see Re Atlantic Computer Systems plc [1992] 1 All ER 476 at
489, [1992] Ch 505 at 528 and Seaconsar Far East Ltd v Bank Markazi Jomhouri
Islami Iran [1993] 4 All ER 456 at 467, [1994] 1 AC 438 at 456.

In some cases it is more logical and convenient to deal with the
question of jurisdiction first, as Rattee J did in this case. However, it is
more convenient on this appeal to consider first whether there is a seriously
arguable claim. On its face the claim is novel: the applicants seek an order
from an English court retrospectively imposing on the assets of an insolvent
company in administration in England a remedial constructive
trust giving them a proprietary interest in those assets. By decree
of the court the Learned consideration would cease to be an asset absolutely
and beneficially owned by PPI. The imposed constructive trust would operate to
exclude that asset from pari passu distribution by the administrators among the
unsecured creditors of PPI in accordance with the legislative scheme prescribed
in the 1986 Act. That surprising result would follow from acceptance of the
applicants submission, explained in the judgment of Rattee J, that,
even in the absence of a pre-existing fiduciary relationship, the proceeds of
sale of shares in subsidiary companies of PPI should be impressed by the
English court with a trust to meet the applicants claim (invoking the
user principle: see Ministry of Defence v Ashman [1993] 2 EGLR 70) for
restitution for unjust enrichment by the wrongful occupation and exploitation
of properties in Northern Cyprus confiscated from the applicants by
discriminatory and expropriatory laws made by the
government of a state not recognised by the government of the United Kingdom. [*822]

In my judgment, the question whether this claim is seriously
arguable should be answered at the outset for two practical reasons: first, if
there is no serious issue to be tried under English law, a final decision on
the question of jurisdiction is unnecessary; secondly, it is difficult to see
how the jurisdictional point can, in any event, be decided without first determining
the nature of the claim advanced by the applicants.

(2) The remedial constructive trust

The conclusion of the judge ([1997] 2 BCLC 630 at 648) was
that

the
question whether the court should impose a remedial constructive trust in those
circumstances is not one which I can properly determine on this application,
but that it may well be a seriously arguable question in the circumstances
which emerge at the trial of the applicants claim.

I agree with the judge that, for the reasons given by him, there
is no seriously arguable claim for an institutional constructive trust. After
detailed argument from both parties on the question of a remedial
constructive trust, I also conclude that the claim of the applicants
that the court should retrospectively confer a proprietary interest on them in
respect of the assets of the insolvent PPI is not seriously arguable in English
law.

I start with the few English cases on the topic, beginning at the
highest level. In Westdeutsche Landesbank Girozentrale v Islington London BC [1996] 2 All ER 961
at 997, [1996] AC 669 at 714-715 Lord Browne-Wilkinson recognised that there is
a critical distinction between an institutional constructive trust and a
remedial constructive trust:

Under
an institutional constructive trust, the trust arises by operation of law as
from the date of the circumstances which give rise to it: the function of the
court is merely to declare that such trust has arisen in the past. The
consequences that flow from such trust having arisen (including the possibly
unfair consequences to third parties who in the interim have received the trust
property) are also determined by rules of law, not under a discretion. A
remedial constructive trust, as I understand it, is different. It is a judicial
remedy giving rise to an enforceable equitable obligation: the extent to which
it operates retrospectively to the prejudice of third parties lies in the
discretion of the court.

In an earlier passage ([1996] 2 All ER 961 at 997, [1996] AC 669
at 714) Lord Browne-Wilkinson said that, whereas the New York law of
constructive trusts had for a long time been influenced by the concept of a
remedial constructive trust, English law has for the most part only
recognised an institutional constructive trust: see Metall und Rohstoff AG v
Donaldson Lufkin & Jenrette Inc [1989] 3 All ER 14 at 56-58, [1990] 1 QB 391
at 478-480.

In the latter case the Court of Appeal, after quoting from
Snells Principles of Equity (28th edn, 1982) p 193 and Goff and Jones
The Law of Restitution (3rd edn, 1986) p 78, said ([1989] 3 All ER 14 at 57,
[1990] 1 QB 391 at 479):

While we have had the benefit of
very full argument on almost all other aspects of the law involved in this case,
we have neither heard nor invited comprehensive argument as to the
circumstances in which the court will be prepared to impose a constructive
trust de novo as a foundation for the grant of an equitable remedy by way of
account or otherwise. Nevertheless, we [*823] are satisfied that there is a
good arguable case that such circumstances may arise and, for want of a better
description, will refer to a constructive trust of this nature as a
remedial constructive trust.

Although
the resulting trust is an unsuitable basis for developing proprietary
restitutionary remedies, the remedial constructive trust, if introduced into English
law, may provide a more satisfactory road forward. The court by way of remedy
might impose a constructive trust on a defendant who knowingly retains property
of which the plaintiff has been unjustly deprived. Since the remedy can be
tailored to the circumstances of the particular case, innocent third parties
would not be prejudiced and restitutionary defences, such as change of
position, are capable of being given effect. However, whether English law
should follow the United States and Canada by adopting the remedial
constructive trust will have to be decided in some future case when the point
is directly in issue.

Later cases do not, in my view, take the matter of remedial
constructive trusts any further than the statements quoted above. The other
cases cited were, first, Re Goldcorp Exchange Ltd (in receivership) [1994] 2 All ER 806
at 826-827, [1995] 1 AC 74 at 104, where Lord Mustill, in his opinion in the
Privy Council, referred to an ill-defined remedial restitutionary
right created by the court after the event superior to the
security created by the charge. He commented: Although
remedial restitutionary rights may prove in the future to be a valuable
instrument of justice they cannot in their Lordships opinion be
brought to bear on the present case.

In El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717
at 733-734 Millett J, having referred to the requirement of a fiduciary
relationship in order to establish a right to trace in equity, made it clear
that reliance was being placed not on some new model remedial
constructive trust, but an old-fashioned institutional resulting
trust. Miss Dohmann, cited from the opinion of Lord Nicholls in Royal
Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97 at 106, [1995] 2 AC 378 at
389, a passage dealing with the liability of a dishonest accessory to a breach
of trust, in particular the comment of Lord Nicholls:

If
a person knowingly appropriates anothers property, he will not escape
a finding of dishonesty simply because he sees nothing wrong in such behaviour
honest people do not knowingly take others
property.

Miss Dohmann contended that the subsidiary companies of PPI in
Northern Cyprus fall within that damning description.

Finally, an earlier case cited in later decisions of the English
courts (and in the Canadian Supreme Court) is Chase Manhattan Bank NA v
Israel-British Bank (London) Ltd [1979] 3 All ER 1025, [1981] Ch 105. The
interest of the case for present purposes lies in the passage ([1979] 3 All ER
1025 at 1033, [1981] Ch 105 at 120) of the judgment of Goulding J, who rejected
the contention that in an insolvency situation the rights of a person claiming
a constructive trust had been excluded by the imposition of a statutory trust
under the Companies Act 1985. Goulding J held that where the claim rested on a
persistent equitable proprietary interest the assets
affected did not, at the commencement of the insolvent [*824] winding up,
belong beneficially to the company and therefore never formed part of the
property subject to the statutory trust arising on a winding up.

That analysis is essential to the applicants case. They
wish to claim priority over the interests of the unsecured creditors of the
insolvent PPI by establishing a proprietary interest in assets which would
exclude those assets from pari passu distribution to the unsecured creditors.
Naturally, they prefer not to stand with their personal claim in the long (and
ultimately unrewarding) wait in the queue at the check-out for the unsecured
creditors of PPI. The applicants wish to apply the analysis of Goulding J in
the case of a persistent equitable proprietary interest to
the case of an equitable proprietary interest arising from the ex post facto
imposition by the court, in the exercise of its discretion, of a remedial
constructive trust.

In my judgment, not even the Supreme Court of Canada, which has
pioneered the remedial constructive trust, has gone that far in imposing such a
trust.

Although all this material is of great interest, none of it
focuses on the precise issue confronting the court in this case: whether it is
seriously arguable that the court, at the trial of the applicants
case, will impose retrospectively a remedial constructive trust over specific
assets of the insolvent PPI in the hands of the administrators, so as to
exclude the unsecured creditors of PPI from any participation in those assets.

As none of the cases directly deal with the insolvency
problem, little would be gained from extensive citation of that
material. The following points may be noted.

1. It is recognised in the most recent of the cases, Korkontzilas
v Soulos (1997) 146 DLR (4th) 214 at 228 that the remedial constructive
trust as a remedy for unjust enrichment is a new development not yet
formally recognised by English law.

2. The remedial constructive trust does not require any
pre-existing fiduciary relationship between the parties nor is it confined to
an institutional function recognising an existing property
right. A remedial constructive trust may be ordered even though there is no
pre-existing right of property. As La Forest J said in the LAC Minerals case (1989) 61 DLR
(4th) 14 at 50:The imposition of a constructive trust can both
recognise and create a right of property.

He explained, having declared himself against a discretionary
remedy imposed whenever the court thinks it just to impose a trust (at 51):


the issue of the appropriate remedy only arises once a valid restitutionary
claim has been made out. The constructive trust awards a right in property, but
that right can only arise once a right to relief has been established. In the
vast majority of cases a constructive trust will not be the appropriate remedy
a constructive trust should only be awarded if there is reason to
grant to the plaintiff the additional rights that flow from recognition of a
right of property. Among the most important of these will [*825] be that it is appropriate
that the plaintiff receive the priority accorded to the holder of a right of
property in a bankruptcy.

3. In Korkontzilas
v Soulos (1997)
146 DLR (4th) 214 the only reference made by McLachlin J to the effect of
awarding a remedial constructive trust on the interests of third parties was
where she said (at 227):

Finally,
it is informed by the absence of an indication that a constructive trust would
have an unfair or unjust effect on the defendant or third parties, matters
which equity has always taken into account. Equitable remedies are flexible;
their award is based on what is just in all the circumstances of the
case.

She identified the four conditions which generally have to be
satisfied for the imposition of a constructive trust as a remedy for unjust
enrichment and, on the fourth of those conditions, said (at 230):

There
must be no factors which would render imposition of a constructive trust unjust
in all the circumstances of the case; e.g., the interests of intervening
creditors must be protected.

4. In his article, Mr Paciocco makes it clear that his
understanding of the remedial constructive trust is that it is proprietary in
the sense that it gives the successful plaintiff rights in the
specific property which are good not only against the defendant but also
against most others, including and most especially, the general creditors of
the defendant. He explains clearly the difference between an
institutional constructive trust, in which pre-determined legal consequences
automatically apply to certain facts when they are found, and a remedial
constructive trust which is discretionary and selected by the court as a remedy
to give effect to a legal right which the court finds has been established. He
deals with the problem of the effect of a remedial constructive trust on
creditors who have acted in good faith without notice of the trust and comments
(at 321): Where a constructive trustee is insolvent, a declaration of
a constructive trust turns the unpaid general creditors of the constructive
trustee into the real losers.

He discusses in his article the problems arising for general
creditors by the imposition of a remedial constructive trust and comments (at
349) that the courts in the United States do not use the remedial constructive
trust where the defendant is insolvent; the reasoning is that the purpose of
the remedial constructive trust is to prevent the defendant, and not his
creditors from being unjustly enriched. The article does not deal specifically
with the problem that faces an English court where a plaintiff seeks to have a
remedial constructive trust imposed on the beneficial assets of an insolvent
company in administration or liquidation.

PPIs INSOLVENCY

In my judgment, the intervening insolvency of PPI means that under
English law there is no seriously arguable case for granting the applicants a
remedial constructive trust on the basis of the allegations in the draft
statement of claim. PPI is a massively insolvent company subject to an
administration order. The administrators are bound to distribute the assets of
PPI among the creditors on the basis of insolvency. Parliament has, in such an
eventuality, sanctioned a scheme for pari passu distribution of
assets designed to achieve a fair distribution of the insolvent
companys property among the unsecured creditors. This [*826] scheme, now
contained in the Insolvency Act 1986, was described by Nicholls V-C in Re
Paramount Airways Ltd [1992] 3 All ER 1 at 4, [1993] Ch 223 at 230, as a
coherent, modernised and expanded code.

The provisions of that code apply both to the case of an insolvent
company which has gone into formal liquidation and to one in respect of which
an administration order has been made. The essential characteristic of the
statutory scheme is that the liquidator or administrator is bound to deal with
the assets of the company as directed by statute for the benefit of all
creditors who come in to prove a valid claim. There is a statutory obligation
on the administrators of PPI to treat the general creditors in a particular
way. A question may arise as to whether a particular asset was or was not the
beneficial property of the company at the date of the commencement of the
winding up (or administration). If it is established in a dispute that it is
not an asset of the company then it never becomes subject of the statutory
insolvency scheme: see Chase Manhattan Bank NA v Israel-British Bank
(London) Ltd [1979] 3 All ER 1025, [1981] Ch 105. If, on the other hand, the
asset is the absolute beneficial property of the company there is no general
power in the liquidator, the administrators or the court to amend or modify the
statutory scheme so as to transfer that asset or to declare it to be held for
the benefit of another person. To do that would be to give a preference to
another person who enjoys no preference under the statutory scheme.

In brief, the position is that there is no prospect of the court
in this case granting a remedial constructive trust to the applicants in
respect of the proceeds of sale of the shares held by PPI in its subsidiaries,
since the effect of the statutory scheme applicable on an insolvency is to shut
out a remedy which would, if available, have the effect of conferring a
priority not accorded by the provisions of the statutory insolvency scheme. In
her eloquent address, Miss Dohmann submitted that the law
moves. That is true. But it cannot be legitimately moved by judicial decision
down a road signed No Entry by Parliament. The insolvency
road is blocked off to remedial constructive trusts, at least when judge driven
in a vehicle of discretion.

For those reasons alone I would refuse leave to the applicants to
commence these proceedings. To a trust lawyer and, even more so to an
insolvency lawyer, the prospect of a court imposing such a trust is
inconceivable and, in my judgment, even the most enthusiastic student of the
law of restitution would be forced to recognise that the scheme imposed by
statute for a fair distribution of the assets of an insolvent company precludes
the application of the equitable principles manifested in the remedial
constructive trust developed by such courts as the Supreme Court of Canada.

JURISDICTION

With only one qualification, I am in complete agreement with the
judgment of Rattee J on jurisdiction. The qualification is in the
judges treatment of the question arising under s 30(1) of the 1982
Act as a pure point of law on which it was appropriate for him to reach a final
decision rather than a decision that the jurisdiction point was arguable. The
question of jurisdiction under s 30(1) is one on which it is not necessary to
reach a final decision ahead of the trial.

I shall deal briefly with the four points on jurisdiction:(1) the Moçambique rule;(2) exceptions
to the Moçambique rule;(3) s 30(1) of the 1982 Act;(4) s 2 of
the 1982 Act and art 2 of the Convention on Jurisdiction and the Enforcement of
Judgments in Civil and Commercial Matters 1968 (the Brussels Convention) as
amended. [*827]

(1) The Moçambique rule

I agree with Rattee J that this case falls within the Moçambique rule, as restated and
applied to a claim relating to land in the Turkish Republic of Northern Cyprus
in Hesperides Hotels Ltd v Aegean Turkish Holidays Ltd [1978] 2 All ER 1168,
[1979] AC 508. It was held in the Hesperides case that the rule
cannot be avoided by framing the action as one of a conspiracy within the
jurisdiction to commit trespass to foreign land. Rattee J accepted the
submissions of PPI that the applicants title to the properties is in
dispute and that there is a real question to be answered as to whether the
court should treat the applicants as having a right to possession of the
properties as against the alleged trespassing subsidiary companies of PPI. I
agree with Rattee J that the decisions in the Moçambique case and the Hesperides case on jurisdiction
at common law are applicable to this case.

(2) Exceptions to Moçambique

I also agree with Rattee J that this case does not fall within the
exception to the rule in Moçambique relied on by Miss
Dohmann. She relied on the exceptions in r 116(3)(a) and (b) of Dicey and
Morris on the Conflict of Laws (12th edn, 1993) p 946, namely that
the action is based on a contract or equity between the
parties and that the question has to be decided for the
purpose of the administration of an estate or trust and the property consists
of movables or immovables in England as well as immovables outside
England. Reliance was also based on the fact that the respondents, as
administrators of PPI, are officers of the court and should not be permitted to
rely upon a technicality where to do so would be dishonourable or shabby; Re
Condon, ex p James (1874) LR 9 Ch App 609, [1874-80] All ER Rep 388. In my judgment,
these exceptions do not apply; the applicants claim for relief by way
of constructive trust is not founded on a contractual or equitable right. It is
founded on the legal ownership of properties in Northern Cyprus. The claim to a
constructive trust imposed on the assets in the hands of the administrators is
the remedy which the applicants assert is appropriate to the infringement of
that right of ownership or possession; but the claim is not itself based on a
contractual or equitable right.

(3) Section 30(1) of the 1982 Act

In my judgment, the contention that these proceedings are not
principally concerned with a question of a title to, or the right to
possession of, property situated outside the United Kingdom is
seriously arguable. I would not therefore disagree with the judges
conclusion that the court has jurisdiction to entertain the proposed action under
that section. As the judge pointed out ([1997] 2 BCLC 630 at 642) the word
principally is used in its ordinary sense for the
most part or chiefly. Whether something is
principally concerned with a specified topic is a matter of judgment, one of
fact and degree. The approach taken by Rattee J in holding that the proceedings
raise substantial questions which are not principally concerned with a question
of title to, or the right to possession, of the property in Cyprus is consistent
with the approach taken in the application of that expression in art 19 of the
Brussels Convention in recent patent cases: see Fort Dodge Animal Health Ltd
v Akzo Nohl [1998] FSR 222 and Coin Controls Ltd v Suzo International (UK)
Ltd
[1997] 3 All ER 45 at 60. I am satisfied by the arguments of Miss Dohmann that
it is seriously arguable that these proceedings are not principally concerned
with the question of title to, or right to possession of, the property. There
would, of course, be arguments on that issue arising from her contentions that
the laws enacted by the government of TRNC have not effectively divested [*828] her clients of
the ownership or right to possession of their properties. She contends, first,
that these laws should not be recognised by the English courts because of their
expropriatory and discriminatory nature: Oppenheimer v Cattermole (Inspector
of Taxes) [1975] 1 All ER 538 at 567, [1976] AC 249 at 278 and Williams
& Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1985] 2 All ER 208
at 213, [1986] AC 368 at 379, where Nourse J said:

English
law will not recognise foreign confiscatory laws which, by reason of their
being discriminatory on grounds of race, religion or the like, constitute so
grave an infringement of human rights that they ought not to be recognised as
laws at all 

Further, Miss Dohmann argues, basing herself on passages in the
judgments of the House of Lords in Carl-Zeiss-Stiftung v Rayner & Keeler
Ltd (No 2) [1966] 2 All ER 536, [1967] 1 AC 853, that the legislative acts
of TRNC are acts of a government of an unrecognised state and that, having
regard to the considerations of public policy already mentioned, those acts
purporting to give title to the land to the subsidiaries of PPI are unlawful and
of no effect. There would, as pointed out by Rattee J, be other issues in the
case which are substantial and cannot be said to be merely incidental to the
questions of title and right to possession. Among those questions would be the
important one of piercing the corporate veil of companies within the PPI group,
so as to hold PPI responsible for the acts of trespass committed by its
subsidiary companies. The claim to a constructive trust rests in part on this
argument. On that issue we were referred to Adams v Cape Industries plc [1991] 1 All ER 929,
[1990] Ch 433 and Re Polly Peck International plc (in administration) [1996] 2 All ER 433
for a statement of the circumstances in which a court treats a corporate
personality as a facade and a group of companies as a single economic unit.
Issues would also arise on the remedial constructive trust claim (if, contrary
to my view, it were maintainable by the applicants) as to whether the
applicants have any rights of a proprietary nature in the proceeds of sale by PPI
of the shares in the subsidiary companies. Rattee J ([1997] 2 BCLC 630 at 642)
held that these are

not minor or incidental questions.
Given that the relevant proceedings, if allowed to be brought, will concern
such questions quite as much as the question of the applicants right
to possession of the properties concerned, in my judgment those proceedings
would be concerned, but not principally concerned, with such right to
possession. I consider that the purpose of s 30(1) of the 1982 Act is to
preserve the Moçambique rule only in cases where the real issue in
the proceedings is the question of title to, or the right to possession of,
foreign land, and all other questions are merely incidental thereto. Such is
not this case.

I agree.

(4) Article 2 of the Brussels Convention

Miss Dohmanns final point was based on the mandatory
language of art 2 conferring jurisdiction in a case where the proposed
defendants are domiciled in the United Kingdom, a contracting state to the
Brussels Convention. The judge did not decide this point because he held that s
30(1) did not operate to exclude jurisdiction. For the same reason I do not
think that it is necessary to reach a final decision on this point. I would
point out that, in any event, at this level of decision this question has
already been decided without reference to the [*829] European Court
of Justice. In Re Harrods (Buenos Aires) Ltd (No 2) [1991] 4 All ER 334,
[1992] Ch 72 the Court of Appeal decided that the provisions of art 2 only
apply as between contracting states, not between a contracting and a
non-contracting state. The object of the convention is not impaired by refusing
jurisdiction as against the court of a non-contracting state. Article 2 has to
be interpreted to reflect the purpose and scheme of the convention as a whole.
In that context, it only regulates jurisdictional questions as between
contracting states. TRNC is not a contracting state. I would, therefore, reject
the contention that jurisdiction could be founded on art 2.

CONCLUSION

For all these reasons, I would allow this appeal and refuse leave
to the applicants to commence the proposed action; it does not raise any
serious question to be tried on the claim for an institutional or a remedial
constructive trust affecting assets of PPI in the hands of the respondent
administrators and it does not contain any other claim which would justify the
grant of leave.

POTTER LJ. I agree.

NOURSE LJ. I also agree that this appeal must be allowed for the
reasons given by Mummery LJ. I add some observations of my own on the
applicants claim that it is seriously arguable that, if they were to
succeed at trial, the court would impose a remedial constructive trust on the
proceeds of the sale of the shares in PPIs subsidiaries.

The formidable and continuing problems of terminology which
afflict the consideration of many questions on constructive trusts make it
desirable to start with definition. In referring to a remedial constructive
trust, I mean an order of the court granting, by way of remedy, a proprietary
right to someone who, beforehand, had no proprietary right.

The essential allegations the applicants seek leave to make were
summarised by Rattee J towards the end of his judgment ([1997] 2 BCLC 630 at
648-649):

(a)
that the applicants remained at all material times entitled to possession of
the applicants properties,(b) that PPI knew that its subsidiaries
were exploiting those properties, to which it knew the applicants claimed title
and the right to possession,(c) that PPI actively encouraged such
exploitation,(d) that it has benefited from that exploitation and should be
bound to disgorge such profit, and (e) that the court should accordingly impose
a remedial constructive trust on so much of the proceeds of the sale by PPI to
Learned Ltd as represents such profit.

Whatever other rights the applicants may have or may have had
against the subsidiaries or PPI itself, it is plain that they have no
proprietary right to any part of the proceeds of the sale of the shares in the
subsidiaries. They could only get one by the imposition of a remedial
constructive trust in their favour. So this case raisesfairly and squarely the question
whether the remedial constructive trust is part of English law.

Although, in passages that Mummery LJ has read, this court (Slade,
Stocker and Bingham LJJ) in Metall und Rohstoff AG v Donaldson Lufkin &
Jenrette Inc [1989] 3 All ER 14, [1990] 1 QB 391, Lord Mustill in Re
Goldcorp Exchange Ltd (in receivership) [1994] 2 All ER 806, [1995] 1 AC 74 and Lord
Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London
BC
[1996] 2 All ER 961, [*830] [1996] AC 669 have accepted the possibility that
the remedial constructive trust may become part of English law, such
observations, being both obiter and tentative, can only be of limited
assistance when the question has to be decided, as it does here. There being no
earlier decision, we must turn to principle. In doing so, we must recognise
that the remedial constructive trust gives the court a discretion to vary
proprietary rights. You cannot grant a proprietary right to A, who has not had
one beforehand, without taking some proprietary right away from B. No English
court has ever had the power to do that, except with the authority of
Parliament; cf Chapman v Chapman [1954] 1 All ER 798, [1954] AC 429. But it is
said that, although that may be the law today, it may not be the law tomorrow.
If the Supreme Court of Canada can develop the law so as to permit the court to
vary proprietary rights without legislative authority, why cannot the House of
Lords do likewise?At least, it is
said, there must be a real prospect that they will, and so the applicants ought
to be allowed to bring their action.

I agree with Mummery LJ that where, as here, there would be not
simply a variation of proprietary rights but a variation of the manner in which
the administrators are directed to deal with PPIs assets by the
Insolvency Act 1986 it is not seriously arguable, even at the highest level,
that a remedial constructive trust would be imposed. For myself, I would go
further and hold that it would not be seriously arguable even if PPI was
solvent. It is not that you need an Act of Parliament to prohibit a variation
of proprietary rights. You need one to permit it: see the Variation of Trusts
Act 1958 and the Matrimonial Causes Act 1973.

Partly because we were only referred to three of the Canadian
decisions and partly because it appears that in none of them has the Supreme
Court had to grapple with the insolvency of the party on whose assets the
remedial constructive trust is to be imposed, this is not an appropriate
occasion for a comparative inquiry into the jurisprudence of our two countries.
Three points ought nevertheless to be made.

First, in Canada the remedial constructive trust, whose origin was
in the dissenting judgment of Laskin J (as he then was) in Murdoch v Murdoch (1973) 41 DLR (3d)
367 (see also Rathwell v Rathwell (1978) 83 DLR (3d) 289), was developed
through Pettkus v Becker (1980) 117 DLR (3d) 257 and Sorochan v Sorochan (1986) 29 DLR (4th)
213 as a remedy in property disputes between married and unmarried couples.
Both Murdoch v Murdoch and, as I understand it, were actually decided on the principles
of Gissing v Gissing [1970] 2 All ER 780, Rathwell v Rathwell [1971] AC and,
subject to a rather surprising difference of opinion in the Supreme Court as to
the findings of the trial judge, Pettkus v Becker could have been so
decided and was so decided by the minority. Sorochan v Sorochan, on the other hand,
could not have been decided according to those principles. In that case the
Supreme Court had to rely for its decision on the remedial constructive trust.
Although there must have been later family property cases which could have been
decided on Gissing v Gissing principles, I believe that the remedial
constructive trust has now become the accepted and perhaps the exclusive remedy
in such cases.

Secondly, in Canada the application of the remedial constructive
trust has not only been extended beyond family property cases (we were referred
to LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th)
14 and Korkontzilas v Soulos (1997) 146 DLR (4th) 214), in the other areas
to which it has been extended there are also cases which could have been
decided in exactly the same way according to principles well known to English
law. For example, I [*831] would think that English notions of breach of
confidential obligation and fiduciary duty were well up to leading to the same
result as in the LAC Minerals Ltd case.

Thirdly, it is evident that some of the early Canadian decisions
in family property cases were influenced by Lord Denning MRs
constructive trust of a new model; cf Cooke v Head [1972] 2 All ER 38,
[1972] 1 WLR 518, Hussey v Palmer [1972] 3 All ER 744, [1972] 1 WLR 1286 and Eves
v Eves
[1975] 3 All ER 768, [1975] 1 WLR 1338. However, in the 1980s this court, in
particular in Burns v Burns [1984] 1 All ER 244, [1984] Ch 317 and Grant
v Edwards [1986] 2 All ER 426, [1986] Ch 638, held that Lord Denning
MRs approach was at variance with the principles stated in Gissing
v Gissing. That is not to say that English law has remained static in this
area. In Grant v Edwards the court was able to achieve the same beneficial result
as in Eves v Eves, although by adopting the approach, not of Lord Denning MR, but
of Brightman J and Browne LJ. Since then the possibility of further
developments through applying the principles of proprietary estoppel has been
signalled by the House of Lords in Lloyds Bank plc v Rosset [1990] 1 All ER 1111,
[1991] 1 AC 107.

It is appropriate that we on this side of the Atlantic should
remind ourselves of some observations of Lord Simonds LC in Chapman v
Chapman
[1954] 1 All ER 798, [1954] AC 429 which were well known at the time but may
have been forgotten. In holding that the court had no inherent jurisdiction to
vary the beneficial interests of infants and unborn persons in settled
property, he said ([1954] 1 All ER 798 at 801-802, [1954] AC 429 at 444):

It
may well be that the result is not logical and it may be asked why, if the
jurisdiction of the court extended to this thing, it did not extend to that
also. But, my Lords, that question is as vain in the sphere of jurisdiction as
it is in the sphere of substantive law. We are as little justified in saying
that a court has a certain jurisdiction, merely because we think it ought to
have it, as we should be in declaring that the substantive law is something
different from what it has always been declared to be, merely because we think
it ought it to be so. It is even possible that we are not wiser than our
ancestors. It is for the legislature, which does not rest under that
disability, to determine whether there should be a change in the law and what
that change should be.

Appeal allowed. Leave to appeal to the House of Lords refused.

30 July 1998. The Appeal Committee of the House of Lords (Lord
Browne-Wilkinson, Lord Nolan and Lord Hoffmann) refused leave to appeal.